This Just In: More Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." The pinstripe-and-wingtip crowd is entitled to its opinions, but we have some pretty sharp stock pickers down here on Main Street, too. And we're not always impressed with how Wall Street does its job.

So perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.

A Sterne rebukeFrom $32 a share in August to $52 in October -- it's been a good run, SanDisk (NAS: SNDK) investors, but now it's done. Or at least, so say the Wall Street wizards at Sterne Agee.

According to Sterne, SanDisk shares today bake in pretty much every positive development you can name in the flash memory industry. The rise of Apple's iPad to dominance, the anticipated arrival of Amazon.com's (NAS: AMZN) Kindle Fire, the surprising strength of Samsung, HTC, Motorola Mobility (NYS: MMI) , and other makers of Google (NYS: GOOG) Android-based smartphones in the market -- it's all in there. And when SanDisk beat earnings last month and gave strong guidance for 2012, that put the icing on the cake.

As a result, today there's more risk of disappointment from SanDisk than room for positive surprises. Consequently, Sterne yanked its "buy" rating on the stock and downgraded SanDisk to "neutral."

I couldn't disagree more.

Valuation mattersBefore I get into Sterne's record on semiconductor stocks, let's take a quick look at the facts. SanDisk shares today cost less than 10 times earnings, a slight discount to the valuation at STEC (NAS: STEC) , and a real bargain relative to OCZ Technology (NYS: OCZ) . Relative to consensus projections for more than 15% long-term growth, 10 times earnings looks like a very nice price.

True, SanDisk's free cash flow picture isn't quite as attractive as it looked last year, but with real cash profits backing up 87% of reported net income, I still come up with about an 11 multiple to free cash flow on the stock -- and that's before you even consider how SanDisk's $1 billion in net cash affects the valuation. (Hint: It makes the stock cheaper.)

Flip a coin, any coinYet despite these numbers, and despite Sterne's own admission that SanDisk remains a "strong long-term stock," the analyst is now cashing in its chips on SanDisk. Is it right to do so?

Perhaps. In fact, I'd go so far as to say that Sterne has a 50-50 chance of being right about SanDisk -- because historically, that's precisely how accurate Sterne's predictions have been in the semiconductor industry. Over the past few years, this analyst has achieved a precise 50% record for accuracy on semiconductor stocks. Right on Skyworks, wrong on Micron. Right on Intel, wrong on AMD. It's about as accurate as a coin flip -- but no better.

Foolish takeawaySo what should an investor do with this week's downgrade of SanDisk? If you're feeling cautious, well ... a 65% profit is nothing to sneeze at. If you decide to take those profits and sell out, I wouldn't blame you a bit. As for me, though, I'm holding onto my shares -- and if the stock gets much cheaper than it already looks, I just might buy more.

On the other hand, if you're planning sell, do you want to roll your SanDisk winnings into the next big winner in computing and mobile technology? What a coincidence! We just happen to have found that winner for you. Read all about it in the Fool's new -- and free! -- report: "Your Credit Card May Soon Be Worthless. Here's Why...."

At the time this
article was published Fool contributorRich Smithowns shares of Google, Micron, and SanDisk. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 320 out of more than 180,000 members.The Motley Fool owns shares of Google, Intel, and Apple, and has bought calls on Intel.Motley Fool newsletter serviceshave recommended buying shares of Google, Intel, Amazon.com, and Apple, as well as creating bull call spread positions on Apple and Intel.We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.